How A Foreclosure Will Impact Your Credit Score

If you’re having trouble paying your mortgage and you’re considering a foreclosure you should consider how a foreclosure will affect your credit score before making a decision. A foreclosure can cause your credit score to plummet, and it will take time and effort to repair your credit after that.

Some homeowners are advised to let their homes go into foreclosure in order to work out a loan modification, but that is a risky plan for homeowners. Your credit score will take a big hit when you stop paying your mortgage and a bigger hit when the foreclosure process starts. If your loan modification doesn’t go through you can be left in a bad situation with poor credit that can keep you from buying another house or renting a home. Some of the ways that a foreclosure will impact your credit score include:

A Huge Drop in Your Credit Score

When you are 30 days late on your mortgage your lender will probably start reporting to the credit bureaus that you are behind. That will cause your credit score to drop, but not by that much. In most cases, your credit score will drop by about 40 points when you’re 30 days late. If you don’t pay your mortgage for 60 days, it can decrease by around 70 points or more. If you don’t pay for 90 days that is usually when a lender will start the foreclosure process and your score can drop by 100 points or more.

It can take quite a bit of time to rebuild your credit after such a significant decline. During that time, you will be unable to do such things as getting a new credit card, getting a car loan or even making large purchases like buying new appliances or furniture without having to pay huge fees, deposits, or interest rates.

Long Term Credit Damage

It will take at least seven years for a foreclosure to come off of your credit report. Even then you may have to fight to get it taken off because not everything falls off your credit report as soon as the seven-year mark hits. Seven years is a considerable amount of time to struggle with bad credit. When the foreclosure finally does come off of your credit report it may take another year or two in order to restore your credit to what it was prior to the foreclosure.

Getting A New Home

If you decide to go through with a foreclosure that foreclosure could make it extremely difficult to purchase or rent a new home. You won’t be able to get a mortgage with a foreclosure on your credit report, at least not one from a reliable lender. Landlords often pull credit reports when they are looking at prospective tenants and you may not be able to qualify for an apartment with a foreclosure on your credit report, in addition to a low credit score. If you can find a landlord willing to take a chance on you, they will probably make you pay extra money in fees or deposits.

The Bottom Line

When considering your options and looking at foreclosure the bottom line is that in the long run, the damage to your credit makes foreclosure a very bad option. You should do everything possible to avoid going into foreclosure. Having a foreclosure on your credit report will limit your options, your ability to obtain credit if you need it, and your housing options for years to come. If you’re struggling to pay your mortgage it’s better to try and work out a payment plan with the lender or explore other options that will allow you to make your mortgage payments on time.